================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended March 31, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-19277
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3317783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
ITT HARTFORD GROUP, INC.
(Former name)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No[ ]
As of April 30, 1997, there were outstanding 117,967,727 shares of Common
Stock, $0.01 par value per share, of the registrant.
================================================================================
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
- - ------------------------------
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Consolidated Statements of Income - First Quarter Ended March 31,
1997 and 1996 3
Consolidated Balance Sheets - March 31, 1997 and December 31, 1996 4
Consolidated Statements of Cash Flows - First Quarter Ended March 31,
1997 and 1996 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II. OTHER INFORMATION
- - ---------------------------
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
Signature 17
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
First Quarter Ended
March 31,
------------------------
(In millions, except for per share data) 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------
(Unaudited)
REVENUES
<S> <C> <C>
Earned premiums $ 2,452 $ 2,656
Net investment income 629 603
Net realized capital gains 37 19
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,118 3,278
----------------------------------------------------------------------------------------------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 1,958 2,041
Amortization of deferred policy acquisition costs 454 411
Other expenses 432 712
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,844 3,164
----------------------------------------------------------------------------------------------------------------
OPERATING INCOME 274 114
Income tax expense 70 18
- - ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 204 $ 96
----------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE $ 1.73 $ 0.82
CASH DIVIDENDS DECLARED PER SHARE $ 0.40 $ 0.40
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 117.7 117.2
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THE ABOVE STATEMENTS.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(In millions, except for share data) 1997 1996
- - ------------------------------------------------------------------------------------------ ---------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments
Fixed maturities, available for sale, at fair value (amortized cost of
$32,048 and $31,178) $ 31,889 $ 31,449
Equity securities, available for sale, at fair value (cost of $1,548 and $1,581) 1,840 1,865
Policy loans, at outstanding balance 3,757 3,839
Other investments, at cost 474 486
- - ------------------------------------------------------------------------------------------ ---------------- -----------------
Total investments 37,960 37,639
Cash 146 112
Premiums receivable and agents' balances 2,009 1,797
Reinsurance recoverables 11,367 11,229
Deferred policy acquisition costs 3,698 3,535
Deferred income tax 1,589 1,480
Other assets 2,628 2,596
Separate account assets 52,125 50,452
- - ------------------------------------------------------------------------------------------ ---------------- -----------------
TOTAL ASSETS $ 111,522 $ 108,840
------------------------------------------------------------------------------------ ---------------- -----------------
LIABILITIES
Future policy benefits, unpaid claims and claim adjustment expenses
Property and casualty $ 18,454 $ 18,303
Life 4,550 4,371
Other policy claims and benefits payable 21,595 22,220
Unearned premiums 2,936 2,797
Short-term debt 1,137 500
Long-term debt 1,025 1,032
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely parent junior subordinated debentures 1,000 1,000
Other liabilities 4,319 3,645
Separate account liabilities 52,125 50,452
- - ------------------------------------------------------------------------------------------ ---------------- -----------------
TOTAL LIABILITIES 107,141 104,320
------------------------------------------------------------------------------------ ---------------- -----------------
STOCKHOLDERS' EQUITY
Common stock - authorized 200,000,000, issued 119,595,832 and
119,194,412 shares, par value $0.01 1 1
Treasury stock - 1,638,000 shares (30) (30)
Capital surplus 1,654 1,642
Cumulative translation adjustments (12) 40
Unrealized gain on securities, net of tax 96 352
Retained earnings 2,672 2,515
- - ------------------------------------------------------------------------------------------ ---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 4,381 4,520
------------------------------------------------------------------------------------ ---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 111,522 $ 108,840
------------------------------------------------------------------------------ ---------------- -----------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THE ABOVE STATEMENTS.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
First Quarter Ended
March 31,
----------------------------------
(In millions) 1997 1996
- - ------------------------------------------------------------------------------------------ ---------------- -----------------
(Unaudited)
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 204 $ 96
ADJUSTMENTS TO NET INCOME
Depreciation and amortization 21 23
Net realized capital gains (37) (19)
Change in receivables, payables and accruals (212) (209)
Accrued and deferred taxes 89 (2)
Increase in liabilities for future policy benefits, unpaid claims and claim
adjustment expenses and unearned premiums 454 191
Increase in deferred policy acquisition costs (182) (121)
(Increase) decrease in reinsurance recoverables and other related assets (268) 281
Other, net 467 308
- - ------------------------------------------------------------------------------------------ ---------------- -----------------
CASH PROVIDED BY OPERATING ACTIVITIES 536 548
- - ------------------------------------------------------------------------------------------ ---------------- -----------------
INVESTING ACTIVITIES
Purchase of investments (9,873) (10,028)
Sale of investments 2,957 3,984
Maturity of investments 6,144 5,373
Additions to plant, property and equipment (13) (12)
- - ------------------------------------------------------------------------------------------ ---------------- -----------------
CASH USED FOR INVESTING ACTIVITIES (785) (683)
- - ------------------------------------------------------------------------------------------ ---------------- -----------------
FINANCING ACTIVITIES
Short-term debt, net 637 (481)
Net proceeds from issuance of company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely parent junior subordinated debentures
-- 484
Dividends paid (48) --
Net receipts from (disbursements for) investment and universal life-type contracts
credited to (charged from) policyholder accounts (316) 191
Other, net 12 --
- - ------------------------------------------------------------------------------------------ ---------------- -----------------
CASH PROVIDED BY FINANCING ACTIVITIES 285 194
- - ------------------------------------------------------------------------------------------ ---------------- -----------------
Foreign exchange rate effect on cash (2) 1
- - ------------------------------------------------------------------------------------------ ---------------- -----------------
Increase in cash 34 60
Cash - beginning of period 112 95
- - ------------------------------------------------------------------------------------------ ---------------- -----------------
CASH - END OF PERIOD $ 146 $ 155
- - ------------------------------------------------------------------------------------------ -- ------------- -- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- - ------------------------------------------------
NET CASH PAID (REFUNDS RECEIVED) DURING THE PERIOD FOR:
Income taxes $ (70) $ (23)
Interest $ 40 $ 34
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THE ABOVE STATEMENTS.
- 5 -
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS EXCEPT FOR SHARE DATA UNLESS OTHERWISE STATED)
- - --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
(A) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of The Hartford
Financial Services Group, Inc. ("The Hartford" or the "Company", formerly ITT
Hartford Group, Inc.) have been prepared in accordance with generally accepted
accounting principles for interim periods. In the opinion of management, these
statements include all normal recurring adjustments necessary to present fairly
the financial position, results of operations and cash flows for the periods
presented. For a description of accounting policies, see Note 1 of Notes to
Consolidated Financial Statements for the fiscal year ended December 31, 1996
included in The Hartford's 1996 Form 10-K Annual Report.
Certain reclassifications have been made to prior year financial information to
conform to current year presentation.
(B) CHANGES IN ACCOUNTING PRINCIPLES
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing earnings per
share previously found in Accounting Principles Board Opinion No. 15, "Earnings
per Share", and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with the presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. This statement is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Adoption of SFAS No. 128 is not expected to have a
material effect on the Company's earnings per share calculation.
NOTE 2. DEBT
During the first quarter of 1997, Hartford Life, Inc. ("HLI"), a wholly-owned
subsidiary of The Hartford, entered into a $1.3 billion unsecured short-term
credit facility with four banks. At March 31, 1997, there was $1.1 billion
outstanding under the facility.
NOTE 3. HLI INITIAL PUBLIC OFFERING AND SHELF REGISTRATION
On February 10, 1997, HLI filed a registration statement with the Securities and
Exchange Commission, as amended on April 24, 1997, relating to an initial public
offering of up to 20% of HLI common stock. HLI is the holding company parent of
The Hartford's significant life subsidiaries. Management intends to use the
proceeds from the offering to reduce certain debt outstanding, to fund growth
initiatives, and for other general corporate purposes. Management of The
Hartford believes the offering will strengthen the Company's financial position
and flexibility. If and when the offering is completed, The Hartford's current
intent is to continue to beneficially own at least 80% of HLI, but it is under
no contractual obligation to do so. The offering is expected to be completed in
the second quarter of 1997.
On February 14, 1997, HLI filed a shelf registration statement for the issuance
and sale of up to $1.0 billion in the aggregate of senior debt securities,
subordinated debt securities and preferred stock of HLI. Management intends to
use the proceeds from any offering for the repayment of debt, including
outstanding commercial paper and other third party indebtedness and the
satisfaction of other obligations, for working capital, capital expenditures,
investments in or loans to subsidiaries and for other general corporate
purposes.
NOTE 4. CONTINGENCIES
(A) LITIGATION
The Hartford is involved in various legal actions, some of which involve claims
for substantial amounts. In the opinion of management, the ultimate liability
with respect to such lawsuits is not expected to be material to the consolidated
financial position, results of operations or cash flows of The Hartford.
(B) ENVIRONMENTAL AND ASBESTOS CLAIMS
Information regarding environmental and asbestos claims may be found in the
Environmental and Asbestos Claims section of the Management's Discussion and
Analysis of Financial Condition and Results of Operations.
- 6 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA UNLESS OTHERWISE STATED)
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of The Hartford as of
March 31, 1997, compared with December 31, 1996, and its results of operations
for the first quarter ended March 31, 1997 compared with the equivalent 1996
period. This discussion should be read in conjunction with the MD&A included in
The Hartford's 1996 Form 10-K Annual Report.
Certain of the statements contained herein (other than statements of historical
fact) are forward-looking statements. Such forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The forward-looking statements are made based upon
management's expectations and beliefs concerning future developments and their
potential effect upon The Hartford. There can be no assurance that future
developments will be in accordance with management's expectations or that the
effect of future developments on The Hartford will be those anticipated by
management. Actual results could differ materially from those expected by The
Hartford, depending on the outcome of certain factors, including those described
with the forward-looking statements herein.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
- - --------------------------------------------------------------------------------
INDEX
- - --------------------------------------------------------------------------------
Consolidated Results of Operations: Operating Summary 7
North American Property & Casualty 8
Life 9
International 9
Other Operations 10
Environmental and Asbestos Claims 10
Investments 12
Capital Resources and Liquidity 15
- - --------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
---------------------------
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
TOTAL REVENUES $ 3,118 $ 3,278
- - --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 204 $ 96
Less: Net realized capital gains, after-tax 25 12
- - --------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 179 $ 84
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Revenues for the first quarter ended March 31, 1997 decreased $160 million, or
5%, from the first quarter of 1996, primarily due to a decrease in premiums from
leveraged corporate-owned life insurance ("COLI") as a result of the Health
Insurance Portability and Accountability Act of 1996 ("HIPA Act of 1996") which
phases out the deductibility of interest on policy loans under leveraged COLI by
1998. Excluding COLI, revenues increased $205, or 7%, due primarily to an
increase in premiums and other considerations resulting from strong group
disability sales, higher fees earned due to the growing block of separate
account assets, growth in Reinsurance operations and AARP (American Association
of Retired Persons) personal lines as well as new business attributable to a
recent agreement with Nationwide Building Society. Higher net investment income
and net realized capital gains also contributed to the increase.
Net income, excluding the impact of net realized capital gains, after-tax, was
$179 compared with $84 for the first quarter of 1996. The Hartford defines this
presentation as "core earnings", after-tax operational results excluding, as
applicable, net realized capital gains or losses, the cumulative effect of
accounting changes, certain other items and allocated Distribution items (as
defined in The Hartford's 1996 Form 10-K Annual Report). Core earnings is an
internal performance measure used by the Company in the management of its
operations. Management believes that this performance measure delineates the
results of operations of the Company's ongoing lines of business in a manner
that allows for a better understanding of the underlying trends in the Company's
current business. However, core earnings should only be analyzed in conjunction
with, and not in lieu of, net income and may not be comparable to other
performance measures used by the Company's competitors.
The increase in core earnings of $95, or 113%, was due primarily to
significantly lower catastrophe and severe winter storm losses totaling $16
after-tax for the first quarter ended March 31, 1997, compared to $77 after-tax
for the first quarter of 1996. Excluding the impact of these losses, core
earnings for the period increased $34, or 21% to $195 over the first quarter of
the prior year. This improvement was driven by premium growth in AARP and Agency
personal lines, increased property & casualty investment income, growth in
earnings on Life annuities, the reduction of incurred environmental and asbestos
losses and the reduction of losses in the Guaranteed Investment Contract
division.
The effective tax rate for the first quarter ended March 31, 1997 was 26%
compared to 16% for the comparable period in 1996. This change was largely due
to tax benefits generated at the 35% Federal tax rate resulting from increased
underwriting losses for the period ended March 31, 1996 compared to the same
period in 1997. Also, tax-exempt interest earned on invested assets was a
principal cause of effective tax rates lower than the 35% U.S. statutory rate.
- 7 -
<PAGE>
SEGMENT RESULTS
The Hartford's reporting segments, which reflect the management structure of the
Company, consist of North American Property & Casualty, Life, International and
Other Operations.
Below is a summary of core earnings by segment.
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
MARCH 31,
---------------------------
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
North American Property & Casualty $ 104 $ 26
Life 62 39
International 14 21
Other Operations (1) (2)
- - --------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 179 $ 84
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The sections that follow analyze each segment's results. Specific topics such as
environmental and asbestos reserves and investment results are discussed
separately following the segment overviews.
- - --------------------------------------------------------------------------------
NORTH AMERICAN PROPERTY & CASUALTY
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
---------------------------
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
TOTAL REVENUES $ 1,605 $ 1,553
- - --------------------------------------------------------------------------------------------------------------------------------
NET INCOME/CORE EARNINGS $ 104 $ 26
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Core earnings for the North American Property & Casualty segment were $104 for
the first quarter ended March 31, 1997, an increase of $78, or 300%, from the
comparable period in 1996. This improvement was primarily due to a $77 decrease
in after-tax underwriting loss. Additionally, increased after-tax net investment
income was offset by higher service costs and lower service fee income from
involuntary pool servicing contracts. (For an analysis of net investment income,
see the Investments section.)
UNDERWRITING RESULTS
Underwriting results represent premiums earned less incurred claims, claim
adjustment expenses and underwriting expenses. The following table displays
written premiums, underwriting results and combined ratios for The Hartford's
North American Property & Casualty segment:
FIRST QUARTER ENDED
MARCH 31,
------------------------------
1997 1996
-----------------------------
(Unaudited)
Written premiums $ 1,488 $ 1,457
Underwriting results, before-tax $ (20) $ (140)
Combined ratio [1] 100.7 109.1
- - -------------------------------------------------------------------
[1] "Combined ratio" is a common industry measurement of property and casualty
underwriting profitability. This ratio is the sum of the ratio of incurred
claims and claim adjustment expenses to premiums earned and the ratio of
underwriting expenses incurred to premiums written.
The North American Property & Casualty segment's written premiums increased 2%
for the first quarter ended March 31, 1997 compared to the equivalent prior year
period. Solid premium growth in Reinsurance operations (11%) and AARP personal
lines (7%) was partially offset by a 6% decrease in Agency personal lines.
Commercial Insurance Operations premium growth was flat for the first quarter
ended March 31, 1997 compared to the prior year's first quarter.
Underwriting results, before-tax, for the first quarter ended March 31, 1997
improved $120 over the comparable prior year period, resulting in an 8.4 point
improvement in the combined ratio. Of this improvement, $95 (or 6.8 points of
combined ratio) resulted from significantly lower catastrophe and severe winter
storm losses compared to those incurred in the harsh winter of 1996. The
remaining $25, or 1.6 point, underwriting improvement is primarily due to strong
performance in the automobile and homeowners' personal lines, particularly
policies sold to AARP members, and the reduction of incurred environmental and
asbestos losses as a result of the charge taken in the third quarter of 1996
upon completion of the Company's environmental and asbestos database study (for
further discussion see Environmental and Asbestos Claims section).
- 8 -
<PAGE>
- - --------------------------------------------------------------------------------
LIFE
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
---------------------------
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
TOTAL REVENUES $ 1,055 $ 1,303
- - --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 63 $ 39
Less: Net realized capital gains, after-tax 1 --
- - --------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 62 $ 39
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Life segment operates in four principal divisions: Annuity, Individual Life
Insurance, Employee Benefits and Guaranteed Investment Contracts. The Life
segment also maintains a Corporate Operation through which it reports items that
are not directly allocable to any of its business divisions.
The Annuity division focuses on the savings and retirement needs of the growing
number of individuals who are preparing for retirement or have already retired.
The variety of products sold within this segment reflects the diverse nature of
the market. These include individual variable annuities, fixed market value
adjustment (MVA) annuities, deferred compensation and retirement plan services
for municipal governments and corporations, structured settlement contracts and
other special purpose annuity contracts, investment management contracts and
mutual funds. The Guaranteed Investment Contracts division consists of
guaranteed rate contract ("GRC") business that is supported by assets held in
either the Company's general account or a guaranteed separate account and
includes Closed Book GRC. The Company decided in 1995, after a thorough review
of its GRC business, that it would significantly de-emphasize general account
GRC, choosing to focus its distribution efforts on other products sold through
other divisions. Management expects no material income or loss from the
Guaranteed Investment Contracts division in the future. For a description of
principal products in the Individual Life Insurance and Employee Benefits
divisions, see The Hartford's 1996 Form 10-K Annual Report. Revenues decreased
$248, or 19%, for in the first quarter ended March 31, 1997 compared to the
first quarter of 1996. A decrease in revenues from COLI of $365, primarily due
to significantly less premiums from leveraged COLI resulting from the HIPA Act
of 1996, was the primary cause of the decrease in revenues. Partially offsetting
the decrease in COLI was a $79 increase, which resulted from higher sales and
renewals on a growing block of group disability business in the Group Insurance
Operation, and a $47 increase primarily due to higher fee income on individual
variable annuity account values in the Annuity division.
Core earnings increased $23, or 59%, in the first quarter of 1997 compared to
the first quarter of 1996 due to growth in the Annuity, Individual Life
Insurance and Employee Benefits operations of 30%, 22% and 13%, respectively,
and the reduction of losses in the Guaranteed Investment Contracts division as a
result of the actions taken in the third quarter of 1996, partially offset by
higher unallocated expenses in the Corporate Operation, primarily due to a $5
increase in interest expense to $16 in the first quarter of 1997 from $11 in the
first quarter of 1996. This increase was primarily related to increased
indebtedness in connection with the announced initial public offering of up to
20% of HLI common stock. (For additional information, see Capital Resources and
Liquidity section under "HLI Initial Public Offering and Shelf Registration".)
- - --------------------------------------------------------------------------------
INTERNATIONAL
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
---------------------------
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
TOTAL REVENUES $ 417 $ 385
- - --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 36 $ 33
Less: Net realized capital gains, after-tax 22 12
- - --------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 14 $ 21
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Revenues for the first quarter ended March 31, 1997 increased $32, or 8%, over
the comparable period in 1996 due primarily to new business attributable to a
recent agreement with Nationwide Building Society at ITT London & Edinburgh in
the United Kingdom to exclusively underwrite its homeowners business and higher
net realized capital gains. (For an analysis of net realized capital gains, see
the Investments section.) Exchange impacts on revenues in the first quarter were
negligible.
Core earnings in the International segment decreased $7, or 33%, for the first
quarter ended March 31, 1997 compared to the same period in 1996. An $8, or 57%,
decrease in core earnings at ITT London & Edinburgh, due primarily to soft
market conditions in the motor line and adverse prior year loss reserve
developments, was partially offset by an increase at Zwolsche Algemeene. Foreign
exchange had a negligible impact on core earnings.
- 9 -
<PAGE>
- - --------------------------------------------------------------------------------
OTHER OPERATIONS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
---------------------------
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
TOTAL REVENUES $ 41 $ 37
- - --------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 1 $ (2)
Less: Net realized capital gains, after-tax 2 --
- - --------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ (1) $ (2)
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Other Operations consist of property and casualty operations of The Hartford
which have discontinued writing new and renewal business. These operations
primarily include First State Insurance Company and its subsidiaries, Fencourt
Reinsurance Company, Ltd. and Excess Insurance Company Limited, which has been
reclassified from ITT London & Edinburgh in the International segment for all
periods presented. The primary focus of these operations is the proper
disposition of claims, resolving disputes and collecting reinsurance proceeds
related largely to business underwritten and reinsured prior to 1985.
Total revenues of $41 for the first quarter ended March 31, 1997 increased $4,
or 11%, compared to the same period in 1996. This increase was due primarily to
a $3 increase in net realized capital gains as discussed in the Investments
section. Core earnings for the first quarter ended March 31, 1997 were
essentially flat compared to the prior year first quarter.
- - --------------------------------------------------------------------------------
ENVIRONMENTAL AND ASBESTOS CLAIMS
- - --------------------------------------------------------------------------------
The Hartford continues to receive claims asserting damages from environmental
exposures and for injuries from asbestos and asbestos-related products, both of
which affect the North American Property & Casualty, International and Other
Operations segments. Environmental claims relate primarily to pollution and
related clean-up costs. With regard to these claims, uncertainty exists which
impacts the ability of insurers and reinsurers to estimate the ultimate reserves
for unpaid losses and related settlement expenses. The Hartford finds that
conventional reserving techniques cannot estimate the ultimate cost of these
claims because of inadequate development patterns and inconsistent emerging
legal doctrine. For the majority of environmental claims and many types of
asbestos claims, unlike any other type of contractual claim, there is almost no
agreement or consistent precedent to determine what, if any, coverage exists or
which, if any, policy years and insurers or reinsurers may be liable. Further
uncertainty arises with environmental claims since claims are often made under
policies, the existence of which may be in dispute, the terms of which may have
changed over many years, which may or may not provide for legal defense costs,
and which may or may not contain environmental exclusion clauses that may be
absolute or allow for fortuitous events. Courts in different jurisdictions have
reached disparate conclusions on similar issues and in certain situations have
broadened the interpretation of policy coverage and liability issues. In light
of the extensive claim settlement process for environmental and asbestos claims,
involving comprehensive fact gathering, subject matter expertise and intensive
litigation, The Hartford established an environmental claims facility in 1992 to
defend itself aggressively against unwarranted claims and to minimize costs.
Within the property and casualty insurance industry, progress has been made in
developing sophisticated, alternative methodologies utilizing company experience
and supplemental databases to assess environmental and asbestos liabilities.
Consistent with The Hartford's practice of using the best techniques to estimate
the Company's environmental and asbestos exposures, a study was conducted in
1996 utilizing internal staff supplemented by outside legal and actuarial
consultants. Use of these new methodologies resulted in The Hartford adjusting
its environmental and asbestos liabilities in the third quarter of 1996. (For
additional information, see The Hartford's 1996 Form 10-K Annual Report.)
Reserve activity for both reported and unreported environmental and asbestos
claims, including reserves for legal defense costs, for the first quarter ended
March 31, 1997 and the year ended December 31, 1996, was as follows (net of
reinsurance):
- 10 -
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENTAL AND ASBESTOS CLAIMS
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
FIRST QUARTER ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
---------------------------------------- ----------------------------------------
(Unaudited)
Environmental Asbestos Total Environmental Asbestos Total
---------------- ----------- ----------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Beginning liability $ 1,439 $ 717 $ 2,156 $ 926 $ 410 $ 1,336
Claims and claim adjustment expenses incurred 1 2 3 603 322 925
Claims and claim adjustment expenses paid (27) (7) (34) (124) (35) (159)
Other [1] -- -- -- 34 20 54
- - --------------------------------------------------------------------------------------------------------------------------------
ENDING LIABILITY [1] [2] $ 1,413 $ 712 $ 2,125 $ 1,439 $ 717 $ 2,156
- - --------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] The 1996 ending liability includes reclassifications of reserves that were
not previously identified as environmental and asbestos.
[2] The ending liabilities are net of reinsurance on reported and unreported
claims of $1,912 and $1,972 for March 31, 1997 and December 31, 1996,
respectively. Gross of reinsurance, as of March 31, 1997 and December 31,
1996 reserves for environmental and asbestos were $2,280 and $1,757 and
$2,342 and $1,786, respectively.
</FN>
</TABLE>
The Hartford believes that the environmental and asbestos reserves reported at
March 31, 1997 are a reasonable estimate of the ultimate remaining liability for
these claims based upon known facts, current assumptions and The Hartford's
methodologies. Future social, economic, legal or legislative developments may
alter the original intent of policies and the scope of coverage. The Hartford
will continue to evaluate new developments and methodologies as they become
available for use in supplementing the Company's ongoing analysis and review of
its environmental and asbestos exposures. These future reviews may result in a
change in reserves, impacting The Hartford's results of operations in the period
in which the reserve estimates are changed. While the effects of future changes
in facts, legal and other issues could have a material effect on future results
of operations, The Hartford does not expect such changes would have a material
effect on its liquidity or financial condition.
- 11 -
<PAGE>
- - --------------------------------------------------------------------------------
INVESTMENTS
- - --------------------------------------------------------------------------------
An important element of the financial results of The Hartford is return on
invested assets. The Hartford's investment activities are divided between the
reportable segments of North American Property & Casualty, Life, International,
and Other Operations. The investment portfolios for these operations are managed
based on the underlying characteristics and nature of their respective
liabilities.
The ratings referenced in the fixed maturities by credit quality tables are
based on the Standard & Poor's system or the equivalent rating of another
nationally recognized rating organization or, if not rated, are internal ratings
assigned by the Company based on the Company's internal analysis of such
securities.
Please refer to The Hartford's 1996 Form 10-K Annual Report for a description of
the Company's investment objectives and policies.
NORTH AMERICAN PROPERTY & CASUALTY
Total invested assets were $13.6 billion at March 31, 1997 and were comprised
primarily of fixed maturities of $12 billion and other investments of $1.6
billion, primarily equity securities. The table below summarizes fixed maturity
holdings by type.
FIXED MATURITIES BY TYPE
- - -----------------------------------------------------------------
MARCH 31, 1997 DECEMBER 31, 1996
- - ------------------------- ------------------- -------------------
(Unaudited)
FAIR FAIR
TYPE VALUE PERCENT VALUE PERCENT
- - ------------------------- ---------- -------- ---------- --------
Corporate $2,136 17.7% $2,160 19.1%
CMO 575 4.8% 655 5.8%
Municipal-tax-exempt 6,940 57.7% 7,123 63.2%
Gov't/Gov't agencies-U.S. 28 0.2% 15 0.1%
Asset backed securities
("ABS") 251 2.1% 206 1.8%
Gov't/Gov't agencies-For. 302 2.5% 279 2.5%
MBS-agency 205 1.7% 213 1.9%
Commercial MBS 190 1.6% 107 0.9%
Municipal-taxable 63 0.5% 68 0.6%
Redeemable pref'd stock 46 0.4% 47 0.4%
Short-term 1,294 10.8% 419 3.7%
- - ------------------------- ---------- -------- ---------- --------
TOTAL FIXED MATURITIES $12,030 100.0% $11,292 100.0%
- - ------------------------- ---------- -------- ---------- --------
The significant increase in short-term holdings is due to the investment of the
proceeds from the sale of Quarterly Income Preferred Securities. The Company
plans to reinvest these into long-term securities.
This segment maintains a high quality fixed maturity portfolio. At March 31,
1997, approximately 95% of the fixed maturity portfolio was invested in
investment-grade securities. The table below summarizes fixed maturity holdings
by credit quality.
FIXED MATURITIES BY CREDIT QUALITY
- - ------------------------------------------------------------------
MARCH 31, 1997 DECEMBER 31, 1996
- - -------------------------- ------------------- ------------------
(Unaudited)
FAIR FAIR
CREDIT QUALITY VALUE PERCENT VALUE PERCENT
- - -------------------------- --------- -------- ---------- --------
AAA $4,317 35.9% $4,296 38.0%
AA 2,390 19.8% 2,538 22.5%
A 1,775 14.7% 1,683 14.9%
BBB 803 6.7% 799 7.1%
Gov't 673 5.6% 720 6.4%
BB & below 540 4.5% 581 5.1%
Not rated 238 2.0% 256 2.3%
Short-term 1,294 10.8% 419 3.7%
- - -------------------------- --------- -------- ---------- --------
TOTAL FIXED MATURITIES $12,030 100.0% $11,292 100.0%
- - -------------------------- --------- -------- ---------- --------
The taxable equivalent duration of the March 31, 1997 fixed maturity portfolio
was 4.9 years compared to 5.0 years at December 31, 1996. Duration is defined as
the market price sensitivity of the portfolio to parallel shifts in the yield
curve.
The North American Property & Casualty segment uses a minimal amount of
derivatives in managing its investments. The notional amount of derivatives was
$125 and $1 as of March 31, 1997 and December 31, 1996, respectively.
INVESTMENT RESULTS
The table below summarizes the North American Property & Casualty segment's
results.
FIRST QUARTER
ENDED MARCH 31,
-------------------
(Unaudited) 1997 1996
- - -------------------------- --------- -------- --------- ---------
Net investment income,
before-tax $177 $161
Net investment income,
after-tax [1] $143 $127
Yield on average invested
assets, before-tax [2] 5.5% 5.6%
Yield on average invested
assets, after-tax [1] [2] 4.5% 4.4%
- - -----------------------------------------------------------------
[1] Due to the significant holdings in tax-exempt investments an after-tax net
investment income and after-tax yield are also included.
[2] Represents annualized three months net investment income (excluding net
realized capital gains) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the quarter ended March 31, 1997, net investment income was $177 compared to
$161 in 1996, an increase of 10%. Before-tax yields on average invested assets
decreased to 5.5% as of March 31, 1997 from 5.6% in 1996. The after-tax yield
increased to 4.5% as of March 31, 1997 from 4.4% in 1996. The increase in net
investment income was primarily due to an increase in invested assets from
operating cash flow and investment of the proceeds from the sale of Quarterly
Income Preferred Securities. The decrease in before-tax yields and increase in
after-tax yields is the result of a portfolio rebalancing which occurred in
1996. The rebalancing shifted assets from taxables to longer duration and higher
yielding tax-exempt bonds.
Net realized capital gains of $24, primarily generated from opportunities in a
strong equity market, were offset by $24 of real estate writedowns.
- 12 -
<PAGE>
LIFE
Invested assets, excluding separate accounts, totaled $19.6 billion at March 31,
1997 and were comprised of $15.6 billion of fixed maturities, $3.8 billion of
policy loans, and other investments of $286. Policy loans, which carry a
weighted-average interest rate of 10.7%, as of March 31, 1997 are secured by the
cash value of the life policy. These loans do not mature in a conventional
sense, but expire in conjunction with the related policy liabilities. The table
below summarizes fixed maturity holdings by type.
FIXED MATURITIES BY TYPE
- - -----------------------------------------------------------------
MARCH 31, 1997 DECEMBER 31, 1996
- - -------------------------- ------------------- ------------------
(Unaudited)
FAIR FAIR
TYPE VALUE PERCENT VALUE PERCENT
- - -------------------------- --------- -------- ---------- --------
Corporate $7,695 49.5% $7,587 48.3%
CMO 1,720 11.1% 2,150 13.7%
Gov't/Gov't agencies-U.S. 257 1.7% 355 2.2%
ABS 2,742 17.6% 2,693 17.1%
Gov't/Gov't agencies-For. 224 1.4% 395 2.5%
MBS-agency 378 2.4% 402 2.6%
Commercial MBS 1,273 8.2% 1,098 7.0%
Municipal-taxable 383 2.5% 266 1.7%
Short-term 878 5.6% 765 4.9%
- - -------------------------- --------- -------- ---------- --------
TOTAL FIXED MATURITIES $15,550 100.0% $15,711 100.0%
- - -------------------------- --------- -------- ---------- --------
The Life segment continued to maintain a high quality fixed maturity portfolio.
As of March 31, 1997, approximately 99% of the fixed maturity portfolio was
invested in investment-grade securities. The table below summarizes fixed
maturity holdings by credit quality.
FIXED MATURITIES BY CREDIT QUALITY
- - -------------------------------------------------------------------
MARCH 31, 1997 DECEMBER 31, 1996
- - ------------------------- -------------------- --------------------
(Unaudited)
FAIR FAIR
CREDIT QUALITY VALUE PERCENT VALUE PERCENT
- - ------------------------- --------- ---------- --------- ---------
AAA $4,432 28.5% $4,695 29.9%
AA 1,848 11.9% 1,902 12.1%
A 5,498 35.4% 5,366 34.2%
BBB 2,610 16.8% 2,581 16.4%
Gov't 242 1.5% 353 2.2%
BB & below 42 0.3% 49 0.3%
Short-term 878 5.6% 765 4.9%
- - ------------------------- --------- ---------- --------- ---------
TOTAL FIXED MATURITIES $15,550 100.0% $15,711 100.0%
- - ------------------------- --------- ---------- --------- ---------
INVESTMENT RESULTS
The table below summarizes the Life segment's results.
FIRST QUARTER
ENDED MARCH 31,
-------------------
(Unaudited) 1997 1996
- - -----------------------------------------------------------------
Net investment income,
before-tax $375 $363
Yield on average
invested assets, before-tax [1] 7.6% 7.1%
Net realized capital gains,
before-tax $1 --
- - -----------------------------------------------------------------
[1] Represents annualized three months net investment income (excluding net
realized capital gains) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the quarter ended March 31, 1997, net investment income totaled $375
compared to $363 in 1996, an increase of 3%. Yields on average invested assets
increased to 7.6% as of March 31, 1997 from 7.1% in 1996. The increase in net
investment income and yields were primarily attributable to the repositioning of
the Closed Book GRC portfolio, including the sale of certain lower yielding
securities whose proceeds were reinvested at substantially higher rates.
There were net realized capital gains of $1 for the first quarter ended March
31, 1997.
ASSET AND LIABILITY MANAGEMENT STRATEGIES
The Life segment employs several risk management tools to quantify and manage
interest rate risk arising from its investments and fixed rate liabilities.
Management monitors the changes in present value between assets and liabilities
resulting from various interest rate scenarios using integrated asset/liability
measurement systems and a proprietary system that simulates the impacts of
parallel and non-parallel yield curve shifts. Based on this current and
prospective information, management implements risk reducing techniques to
improve the match between assets and liabilities.
Derivatives play an important role in facilitating the management of interest
rate risk, creating opportunities to fund obligations to policyholders and
contractholders, hedging against risks that affect the value of certain
liabilities and adjust broad investment risk characteristics as a result of any
significant changes in market risks. As an end user of derivatives, the segment
employs a variety of derivative financial instruments, including swaps, caps,
floors, forwards and exchange-traded financial futures and options in order to
hedge exposure to price, foreign currency and/or interest rate risk on
anticipated investment purchases or existing assets and liabilities. The
notional amounts of derivative contracts represent the basis upon which pay and
receive amounts are calculated and are not reflective of credit risk for
derivative contracts. Credit risk for derivative contracts is limited to the
amounts calculated to be due to the Company on such contracts. The Company
believes it maintains prudent policies regarding the financial stability and
credit standing of its major counterparties and typically requires credit
enhancement provisions to further limit its credit risk. Many of these
derivative contracts are bilateral agreements that are not assignable without
the consent of the relevant counterparty. Notional amounts pertaining to
derivative financial instruments totaled $10.3 billion at March 31, 1997 ($7.8
billion related to life insurance investments and $2.5 billion related to life
insurance liabilities) and $10.9 billion at December 31, 1996 ($8.3 billion
related to life insurance investments and $2.6 billion related to life insurance
liabilities). Management believes that the use of derivatives allows the Company
to sell more innovative products, capitalize on market opportunities and execute
a more flexible investment strategy for its general account portfolio.
- 13 -
<PAGE>
INTERNATIONAL
Invested assets, excluding separate accounts, totaled $2.6 billion at March 31,
1997 and were comprised of fixed maturities of $2.1 billion and other
investments of $467, primarily equity securities. The table below summarizes
fixed maturity holdings by type.
FIXED MATURITIES BY TYPE
- - -----------------------------------------------------------------
MARCH 31, 1997 DECEMBER 31, 1996
- - ------------------------- ------------------- -------------------
(Unaudited)
FAIR FAIR
TYPE VALUE PERCENT VALUE PERCENT
- - -------------------------- --------- -------- ---------- --------
Corporate $445 21.0% $401 18.3%
Gov't/Gov't agencies-U.S. 57 2.7% 29 1.3%
Gov't/Gov't agencies-For. 1,039 49.1% 1,384 63.1%
Short-term 577 27.2% 379 17.3%
- - -------------------------- --------- -------- ---------- --------
TOTAL FIXED MATURITIES $2,118 100.0% $2,193 100.0%
- - -------------------------- --------- -------- ---------- --------
As of March 31, 1997, the fixed maturity portfolio consisted of 100% investment
grade securities with no security rated lower than A. Minimal use is made of
derivatives which, if purchased, are used for hedging market and foreign
exchange risk. The table below summarizes fixed maturity holdings by credit
quality.
FIXED MATURITIES BY CREDIT QUALITY
- - ------------------------------------------------------------------
MARCH 31, 1997 DECEMBER 31, 1996
- - -------------------------- ------------------- -------------------
(Unaudited)
FAIR FAIR
CREDIT QUALITY VALUE PERCENT VALUE PERCENT
- - --------------------------- --------- --------- --------- --------
AAA $1,403 66.3% $1,750 79.8%
AA 134 6.3% 60 2.7%
A 4 0.2% 4 0.2%
Short-term 577 27.2% 379 17.3%
- - -------------------------- --------- --------- --------- --------
TOTAL FIXED MATURITIES $2,118 100.0% $2,193 100.0%
- - -------------------------- --------- --------- --------- --------
INVESTMENT RESULTS
The table below summarizes the International segment's results.
FIRST QUARTER
ENDED MARCH 31,
-------------------
(Unaudited) 1997 1996
- - -------------------------- --------- -------- --------- ---------
Net investment income,
before-tax $41 $43
Yield on average
invested assets, before-tax [1] 6.4% 7.2%
Net realized capital
gains, before-tax $33 $19
- - -----------------------------------------------------------------
[1] Represents annualized three months net investment income (excluding net
realized capital gains) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the quarter ended March 31, 1997, net investment income totaled $41 compared
to $43 in 1996, a decrease of 5%. Yields on average invested assets decreased to
6.4% as of March 31, 1997 from 7.2% in 1996. The decrease in net investment
income and yields was primarily due to special dividends received on certain
utility equity securities owned in 1996 which generated additional investment
income.
Net realized capital gains increased 74% to $33 in March 31, 1997 from $19 in
1996, primarily the result of opportunities in a strong equity market.
OTHER OPERATIONS
Invested assets were $2.2 billion at March 31, 1997 and were mostly comprised of
fixed maturities. The table below summarizes fixed maturity holdings by type.
FIXED MATURITIES BY TYPE
- - -----------------------------------------------------------------
MARCH 31, 1997 DECEMBER 31, 1996
- - ------------------------- ------------------- -------------------
(Unaudited)
FAIR FAIR
TYPE VALUE PERCENT VALUE PERCENT
- - -------------------------- --------- -------- ---------- --------
Corporate $1,427 65.1% $1,458 64.7%
CMO 36 1.6% 40 1.8%
Gov't/Gov't agencies-U.S. 129 5.9% 141 6.2%
ABS 111 5.1% 148 6.6%
Gov't/Gov't agencies-For. 74 3.4% 72 3.2%
MBS-agency 35 1.6% 36 1.6%
Commercial MBS 102 4.7% 88 3.9%
Municipal-taxable 59 2.7% 22 1.0%
Short-term 218 9.9% 248 11.0%
- - -------------------------- --------- -------- ---------- --------
TOTAL FIXED MATURITIES $2,191 100.0% $2,253 100.0%
- - -------------------------- --------- -------- ---------- --------
Other Operations maintains a greater than 99% investment grade fixed maturity
portfolio. The table below summarizes fixed maturity holdings by credit quality.
FIXED MATURITIES BY CREDIT QUALITY
- - ------------------------------------------------------------------
MARCH 31, 1997 DECEMBER 31, 1996
- - ------------------------- ------------------- -------------------
(Unaudited)
FAIR FAIR
CREDIT QUALITY VALUE PERCENT VALUE PERCENT
- - -------------------------- --------- -------- ---------- --------
AAA $232 10.6% $253 11.2%
AA 347 15.8% 365 16.2%
A 1,095 50.0% 1,093 48.5%
BBB 93 4.3% 78 3.5%
Gov't 202 9.2% 216 9.6%
Not rated 4 0.2% -- --
Short-term 218 9.9% 248 11.0%
- - -------------------------- --------- -------- ---------- --------
TOTAL FIXED MATURITIES $2,191 100.0% $2,253 100.0%
- - -------------------------- --------- -------- ---------- --------
INVESTMENT RESULTS
The table below summarizes Other Operations results.
FIRST QUARTER
ENDED MARCH 31,
-------------------
(Unaudited) 1997 1996
- - -------------------------- --------- -------- --------- ---------
Net investment income,
before-tax $36 $36
Yield on average
invested assets, before-tax [1] 6.5% 6.3%
Net realized capital
gains, before-tax $3 --
- - -----------------------------------------------------------------
[1] Represents annualized three months net investment income (excluding net
realized capital gains) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the quarter ended March 31, 1997, net investment income and yields on
average invested assets were essentially flat compared to the comparative period
in 1996.
There was $3 of net realized capital gains for the quarter ended March 31, 1997
due primarily as a result of portfolio rebalancing.
- 14 -
<PAGE>
- - --------------------------------------------------------------------------------
CAPITAL RESOURCES AND LIQUIDITY
- - --------------------------------------------------------------------------------
Capital resources and liquidity represent the overall financial strength of The
Hartford and its ability to generate strong cash flows from each of the business
segments and borrow funds at competitive rates to meet operating and growth
needs. The capital structure of The Hartford consists of debt and equity,
summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
- - -------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Short-term debt $ 1,137 $ 500
Long-term debt 1,025 1,032
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely parent junior subordinated debentures (QUIPS) 1,000 1,000
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 3,162 $ 2,532
------------------------------------------------------------------------------------------------------------------------
Equity excluding unrealized gain on securities, net of tax $ 4,285 $ 4,168
Unrealized gain on securities, net of tax 96 352
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 4,381 $ 4,520
------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION EXCLUDING UNREALIZED GAIN ON SECURITIES, NET OF TAX $ 7,447 $ 6,700
------------------------------------------------------------------------------------------------------------------------
Debt to equity excluding unrealized gain on securities, net of tax 74% 61%
Debt to capitalization excluding unrealized gain on securities, net of tax 42% 38%
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CAPITALIZATION
The Hartford's total capitalization, excluding unrealized gain, on securities,
net of tax, increased by $747 as of March 31, 1997 compared to December 31,
1996. This change primarily was the result of earnings of $204 and additional
net borrowings totaling $630, partially offset by dividends declared of $47 on
The Hartford common stock. The Company's debt to equity and debt to
capitalization ratios (both excluding unrealized gain on securities, net of tax)
increased at March 31, 1997 as compared to December 31, 1996 primarily as a
result of the debt entered into by HLI as described below. Upon completion of
the initial public offering and the shelf registration of HLI, management
expects these ratios to approximate previous levels.
DEBT
On February 10, 1997, HLI entered into a $1.3 billion unsecured short-term
credit facility with four banks. At March 31, 1997, there was $1.1 billion
outstanding under the facility. The Hartford used the proceeds of these
additional borrowings to fund the insurance operations of its subsidiaries and
partially repay outstanding commercial paper.
HLI INITIAL PUBLIC OFFERING AND SHELF REGISTRATION
On February 10, 1997, HLI filed a registration statement with the Securities and
Exchange Commission relating to an initial public offering of up to 20% of HLI
common stock. HLI is the holding company parent of The Hartford's significant
life subsidiaries. Management intends to use the proceeds from the offering to
reduce certain debt outstanding, to fund growth initiatives, and for other
general corporate purposes. Management of The Hartford believes the offering
will strengthen the Company's financial position and flexibility. If and when
the offering is completed, The Hartford's current intent is to continue to
beneficially own at least 80% of HLI, but it is under no contractual obligation
to do so. The offering is expected to be completed in the second quarter of
1997.
On February 14, 1997, HLI filed a shelf registration statement for the issuance
and sale of up to $1.0 billion in the aggregate of senior debt securities,
subordinated debt securities and preferred stock of HLI. Management intends to
use the proceeds from any offering for the repayment of debt, including
outstanding commercial paper and other third party indebtedness and the
satisfaction of other obligations, for working capital, capital expenditures,
investments in or loans to subsidiaries and for other general corporate
purposes.
DIVIDENDS
On February 27, 1997, The Hartford declared a dividend on its common stock of
$0.40 per share payable on April 1, 1997 to all shareholders of record as of
March 10, 1997.
CASH FLOWS
FIRST QUARTER ENDED
MARCH 31,
----------------------------
1997 1996
- - ----------------------------------------------------------------
(Unaudited)
Cash provided by operating $ $
activities 536 548
Cash used for investing activities $ (785) $ (683)
Cash provided by financing $ $
activities 285 194
Cash - end of period $ 146 $ 155
- - ----------------------------------------------------------------
During the first quarter of 1997, cash provided by operating activities
decreased $12 from the prior period. The changes in cash provided by financing
activities and used for investing activities between periods were primarily due
to increased borrowing activity partially offset by dividends paid and declines
in investment-type contracts written in the Life segment coupled with increases
in investment-type contract maturities. Operating cash flows in both periods
have been more than adequate to meet liquidity requirements.
- 15 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Hartford is a defendant in various lawsuits arising out of its business. In
the opinion of management, the ultimate liability with respect to such lawsuits
is not expected to be material to the consolidated financial position, results
of operations or cash flow of The Hartford.
The Hartford is involved in claim litigation arising in the ordinary course of
business and accounts for such activity through the establishment of policy
reserves. As further discussed in the MD&A under the Environmental and Asbestos
Claims section, The Hartford continues to receive environmental and asbestos
claims which involve significant uncertainty regarding policy coverage issues.
Regarding these claims, The Hartford continually reviews its overall reserve
levels, reserving methodologies and reinsurance coverages.
ITEM 5. OTHER INFORMATION
On May 2, 1997, the Company's shareholders voted at the Company's Annual Meeting
to change the Company's legal name from ITT Hartford Group, Inc. to The Hartford
Financial Services Group, Inc. The Company's New York Stock Exchange trading
symbol "HIG" has not been changed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibits Index.
(b) On February 14, 1997, The Hartford filed a Form 8-K, reporting under Item 5,
Other Events, that Hartford Life, Inc. ("HLI"), an indirect wholly-owned
subsidiary of The Hartford, filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission for an initial public offering of up to 20%
of HLI common stock.
- 16 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Hartford Financial Services Group, Inc.
(Registrant)
/s/ James J. Westervelt
------------------------------------------------
James J. Westervelt
Senior Vice President and Group Controller
(Chief Accounting Officer)
MAY 14, 1997
- 17 -
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FORM 10-Q
EXHBITS INDEX
EXHIBIT #
- - ---------
10.01 Credit Agreement dated as of February 10, 1997 among Hartford Life,
Inc., the lenders named therein and Citibank, N.A. as administrative
agent is incorporated herein by reference to Exhibit 10.8 of the
Registration Statement on Form S-1 (Amendment No. 2) of Hartford Life,
Inc., filed April 24, 1997 (registration no. 333-21459).
10.02 The Hartford 1996 Restricted Stock Plan for non-employee directors, as
amended, is filed herewith.
10.03 The Hartford 1995 Incentive Stock Plan, as amended, is filed herewith.
11.01 Computation of Earnings Per Share is filed herewith.
12.01 Computation of Ratios of Earnings to Fixed Charges and Earnings to
Combined Fixed Charges and Preferred Stock Dividends is filed
herewith.
27 Financial Data Schedule is filed herewith.
- 18 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.01
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
(In millions, except per share data)
First Quarter Ended
March 31,
------------------------------
1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Net income $ 204 $ 96
Weighted average common shares outstanding 117.7 117.2
Earnings per share $ 1.73 $ 0.82
- - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 19 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12.01
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(In millions)
First Quarter Ended
March 31,
----------------------------------
1997 1996
- - -----------------------------------------------------------------------------------------------------------------
(Unaudited)
EARNINGS
<S> <C> <C>
OPERATING INCOME $ 274 $ 114
ADD:
FIXED CHARGES
Interest expense 45 35
Interest factor attributable to rentals 12 9
- - -----------------------------------------------------------------------------------------------------------------
TOTAL FIXED CHARGES 57 44
- - -----------------------------------------------------------------------------------------------------------------
EARNINGS, AS DEFINED $ 331 $ 158
- - -----------------------------------------------------------------------------------------------------------------
RATIOS
Earnings, as defined, to total fixed charges 5.8 3.6
Earnings, as defined, to combined fixed charges and preferred dividend
requirements [1] 5.8 3.6
- - -----------------------------------------------------------------------------------------------------------------
<FN>
[1] There were no shares of preferred stock outstanding during the periods
included above.
</FN>
</TABLE>
- 20 -
<PAGE>
EXHIBIT 10.02
THE HARTFORD 1996 RESTRICTED STOCK PLAN
FOR NON-EMPLOYEE DIRECTORS
The following is the text of the Plan:
ARTICLE I -- PLAN ADMINISTRATION AND ELIGIBILITY
1.1 PURPOSE
The purpose of the ITT Hartford Group, Inc. 1996 Restricted Stock Plan for
Non-Employee Directors (the "Plan") is to attract and retain persons of ability
as directors of ITT Hartford Group, Inc. (the "Company") and to provide them
with a closer identity with the interests of the Company's stockholders by
paying the Annual Retainer in common stock of the Company (the "Stock") subject
to certain restrictions as described herein (the "Restricted Stock").
1.2 ADMINISTRATION
The Plan shall be administered by the Compensation and Personnel Committee
of the Board of Directors (hereinafter referred to as the "Committee"). The
Committee shall have the responsibility of interpreting the Plan and
establishing and amending such rules and regulations necessary or appropriate
for the administration of the Plan. All interpretations of the Plan or any
Restricted Stock awards issued under it shall be final and binding upon all
persons having an interest in the Plan. No member of the Committee shall be
liable for any action or determination taken or made in good faith with respect
to this Plan or any award granted hereunder.
1.3 ELIGIBILITY
Directors of the Company who are not employees of the Company or any of its
subsidiaries shall be eligible to participate in the Plan.
1.4 STOCK SUBJECT TO THE PLAN
(a) The maximum number of shares which may be granted under the Plan shall
be 100,000 shares of common stock of the Company (the "Stock").
(b) If any Restricted Stock is forfeited by a Director in accordance with
the provisions of Section 2.2(c), such shares of Restricted Stock shall be
restored to the total number of shares available for grant pursuant to the Plan.
<PAGE>
(c) Upon the grant of a Restricted Stock award the Company may distribute
newly issued shares or treasury shares, reacquired stock, stock purchased in the
open market, or any combination of the foregoing.
ARTICLE II -- RESTRICTED STOCK
2.1 RESTRICTED STOCK AWARDS
Restricted Stock awards shall be made automatically on the date of the
Annual Meeting of Stockholders, to each Director elected at the meeting or
continuing in office following the meeting. The award shall equal the number of
whole shares arrived at by dividing the Annual Retainer that is in effect for
the 12 month period beginning with the date of the Annual Meeting (the "Service
Year") by the Fair Market Value of the Company's common stock.
Fractional shares shall be paid in cash.
(a) "Annual Retainer" shall mean the amount that is payable to a Director
for service on the Board of Directors during the Service Year. Annual Retainer
shall not include fees paid for attendance at any Board or Committee meeting.
(b) "Fair Market Value" shall mean the average of the high and low prices
per share of the Company's common stock on the date of the Annual Meeting, as
reported by the New York Stock Exchange Composite Tape.
2.2 TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS
(a) Written Documentation -- Restricted Stock awards shall be evidenced by
such written notice, agreement or other documentation as the Committee deems
appropriate.
(b) Shares held in Escrow -- The Restricted Stock subject to such award
shall be registered in the name of the Director and held in escrow by the
Committee until the restrictions on such shares lapse as described below.
(c) Restrictions -- Restricted Stock granted to a Director may not be sold,
assigned, transferred, pledged or otherwise disposed of, except by will or the
laws of descent and distribution, prior to the earliest of the following dates:
(1) The fifth anniversary of the date of grant.
(2) Retirement from the Board at age 72.
(3) "Change in Control" of the Company. A "Change in Control" shall be
deemed to have occurred if:
- 2 -
<PAGE>
(i) a report on Schedule 13D shall be filed with the Securities and
Exchange Commission pursuant to Section 13(d) of the Securities Exchange Act
of 1934 (the "Act") disclosing that any person (within the meaning of
Section 13(d) of the Act), other than the Company or a subsidiary of the
Company or any employee benefit plan sponsored by the Company or a
subsidiary of the Company, is the beneficial owner directly or indirectly of
twenty percent or more of the outstanding Stock of the Company;
(ii) any person (within the meaning of Section 13(d) of the Act), other
than the Company or a subsidiary of the Company or any employee benefit plan
sponsored by the Company or a subsidiary of the Company, shall purchase
shares pursuant to a tender offer or exchange offer to acquire any Stock of
the Company (or securities convertible into Stock) for cash, securities or
any other consideration, provided that after consummation of the offer, the
person in question is the beneficial owner (as such term is defined in Rule
13d-3 under the Act), directly or indirectly, of fifteen percent or more of
the outstanding Stock of the Company (calculated as provided in paragraph
(d) of Rule 13d-3 under the Act in the case of rights to acquire Stock);
(iii) the stockholders of the Company shall approve (A) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of Stock of
the Company would be converted into cash, securities or other property,
other than a merger of the Company in which holders of Stock of the Company
immediately prior to the merger have the same proportionate ownership of
common stock of the surviving corporation immediately after the merger as
immediately before, or (B) any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all or substantially
all the assets of the Company; or
(iv) there shall have been a change in a majority of the members of the
Board within a 12-month period unless the election or nomination for
election by the Company's stockholders of each new director during such
12-month period was approved by the vote of two-thirds of the directors then
still in office who were directors at the beginning of such 12-month period.
(4) Death of the Director.
(5) Disability of the Director, as defined in The Hartford Investment and
Savings Plan, as amended from time to time.
(6) Resignation by the Director under cases of special circumstances and the
Committee, in its sole discretion, consents to waive any remaining restrictions.
(d) Dividends and Voting Rights -- The Director shall, subject to Section
2.2(c), possess all incidents of ownership of the shares of Restricted Stock
including the right to receive dividends with respect to such shares and to vote
such shares.
(e) The Company shall deliver to the Director, or the beneficiary of such
Director, if applicable, all of the shares of stock that were awarded to the
Director as Restricted Stock, within 30 days following the lapse of restrictions
as described under Section 2.2(c). If the Director discontinues serving on the
Board prior to the date upon which restrictions lapse as described
- 3 -
<PAGE>
under Section 2.2(c), such Director's Restricted Stock will be forfeited by the
Director and transferred to and reacquired by the Company at no cost to the
Company.
ARTICLE III -- GENERAL PROVISIONS
3.1 AUTHORITY
Appropriate officers of the Company designated by the Committee are
authorized to execute Restricted Stock agreements, and amendments thereto, in
the name of the Company, as directed from time to time by the Committee.
3.2 ADJUSTMENTS IN THE EVENT OF CHANGE IN COMMON STOCK OF THE COMPANY
In the event of any reorganization, merger, recapitalization, consolidation,
liquidation, stock dividend, stock split, reclassification, combination of
shares, rights offering, split-up, or extraordinary dividend (including a
spin-off) or divestiture, or any other change in the corporate structure or
shares, the number and kind of shares which thereafter may be granted under the
Plan and the number of shares of Restricted Stock awarded pursuant to Section
2.1 with respect to which all restrictions have not lapsed, shall be
appropriately adjusted consistent with such change in such manner as the Board
in its discretion may deem equitable to prevent substantial dilution or
enlargement of the rights granted to, or available for, Directors participating
in the Plan. Any fractional shares resulting from such adjustments shall be
eliminated.
3.3 RIGHTS OF DIRECTORS
The Plan shall not be deemed to create any obligation on the part of the
Board to nominate any Director for reelection by the Company's stockholders or
to retain any Director at any particular rate of compensation. The Company shall
not be obligated to issue Stock pursuant to an award of Restricted Stock for
which the restrictions hereunder have lapsed if such issuance would constitute a
violation of any applicable law. Except as provided herein, no Director shall
have any rights as a stockholder with respect to any shares of Restricted Stock
awarded to such Director.
3.4 BENEFICIARY
A Director may file with the Committee a written designation of a
beneficiary on such form as may be prescribed by the Committee and may, from
time to time, amend or revoke such designation. In the event of the death of a
Director, the Director's beneficiary shall have the right to receive the shares
of Restricted Stock awarded pursuant to the Plan. If no designated beneficiary
survives the Director, the executor or administrator of the Director's estate
shall be deemed to be the Director's beneficiary.
- 4 -
<PAGE>
3.5 LAWS AND REGULATIONS
The Committee shall have the right to condition any issuance of shares to
any Director hereunder on such Director's undertaking in writing to comply with
such restrictions on the subsequent disposition of such shares as the Committee
shall deem necessary or advisable as a result of any applicable law or
regulation. The Committee may postpone the delivery of stock following the lapse
of restrictions with respect to awards of Restricted Stock for such time as the
Committee in its discretion may deem necessary, in order to permit the Company
with reasonable diligence (i) to effect or maintain registration of the Plan, or
the shares issuable upon the lapse of certain restrictions respecting awards of
Restricted Stock, under the Securities Act of 1933 or the securities laws of any
applicable jurisdiction, or (ii) to determine that such shares and the Plan are
exempt from such registration; the Company shall not be obligated by virtue of
any Restricted Stock agreement or any provision of the Plan to recognize the
lapse of certain restrictions respecting awards of Restricted Stock or issue
shares in violation of said Act or of the law of the government having
jurisdiction thereof.
3.6 AMENDMENT, SUSPENSION AND DISCONTINUANCE OF THE PLAN
The Board may from time to time amend, suspend or discontinue the Plan,
provided that the Board may not, without the approval of the holders of a
majority of the outstanding shares entitled to vote, take any action which would
cause the Plan to no longer comply with Rule 16b-3 under the Act, or any
successor rule or other regulatory requirement.
No amendment, suspension or discontinuance of the Plan shall impair a
Director's right under a Restricted Stock award previously granted to the
Director without the Director's consent.
3.7 GOVERNING LAW
This Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of Connecticut.
3.8 EFFECTIVE DATE AND DURATION OF THE PLAN
This Plan shall be effective upon the Distribution Date, subject to the
approval of the Plan by the stockholders of the Company, and shall terminate on
December 31, 2005 (as defined in the Proxy Statement of ITT Corporation dated
August 30, 1995) provided that grants of Restricted Stock made prior to the
termination of the Plan may vest following such termination in accordance with
their terms.
- 5 -
EXHIBIT 10.03
THE HARTFORD 1995 INCENTIVE STOCK PLAN
The following is the text of the Plan:
1. PURPOSE
The purpose of the The Hartford 1995 Incentive Stock Plan is to motivate and
reward superior performance on the part of employees of ITT Hartford Group, Inc.
and its subsidiaries ("The Hartford") and to thereby attract and retain
employees of superior ability. In addition, the Plan is intended to further
opportunities for stock ownership by such employees in order to increase their
proprietary interest in The Hartford and, as a result, their interest in the
success of the Company. Awards will be made, in the discretion of the Committee,
to Key Employees (including officers and directors who are also employees) whose
responsibilities and decisions directly affect the performance of any
Participating Company and its subsidiaries. Such incentive awards may consist of
stock options, stock appreciation rights payable in stock or cash, performance
shares, restricted stock or any combination of the foregoing, as the Committee
may determine.
2. DEFINITIONS
When used herein, the following terms shall have the following meanings:
"Acceleration Event" means the occurrence of an event defined in Section 9
of the Plan.
"Act" means the Securities Exchange Act of 1934.
"Annual Limit" means the maximum number of shares of Stock for which Awards
may be granted under the Plan in each Plan Year as provided in Section 3 of the
Plan.
"Award" means an award granted to any Key Employee in accordance with the
provisions of the Plan in the form of Options, Rights, Performance Shares or
Restricted Stock, or any combination of the foregoing.
"Award Agreement" means the written agreement evidencing each Award granted
to a Key Employee under the Plan.
"Beneficiary" means the beneficiary or beneficiaries designated pursuant to
Section 10 to receive the amount, if any, payable under the Plan upon the death
of a Key Employee.
<PAGE>
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as now in effect or as
hereafter amended. (All citations to sections of the Code are to such sections
as they may from time to time be amended or renumbered.)
"Committee" means the Compensation and Personnel Committee of the Board or
such other committee as may be designated by the Board to administer the Plan.
"Company" means The Hartford and its successors and assigns.
"Fair Market Value", unless otherwise indicated in the provisions of this
Plan, means, as of any date, the composite closing price for one share of Stock
on the New York Stock Exchange or, if no sales of Stock have taken place on such
date, the composite closing price on the most recent date on which selling
prices were quoted, the determination to be made in the discretion of the
Committee.
"Incentive Stock Option" means a stock option qualified under Section 422 of
the Code.
"Key Employee" means an employee (including any officer or director who is
also an employee) of any Participating Company whose responsibilities and
decisions, in the judgment of the Committee, directly affect the performance of
the Company and its subsidiaries.
"Limited Stock Appreciation Right" means a stock appreciation right which
shall become exercisable automatically upon the occurrence of an Acceleration
Event as described in Section 9 of the Plan.
"Option" means an option awarded under Section 5 of the Plan to purchase
Stock of the Company, which option may be an Incentive Stock Option or a
non-qualified stock option.
"Participating Company" means the Company or any subsidiary or other
affiliate of the Company; provided, however, for Incentive Stock Options only,
"Participating Company" means the Company or any corporation which at the time
such Option is granted qualifies as a "subsidiary" of the Company under Section
424(f) of the Code.
"Performance Share" means a performance share awarded under Section 6 of the
Plan.
"Plan" means the The Hartford 1995 Incentive Stock Plan, as the same may be
amended, administered or interpreted from time to time.
- 2 -
<PAGE>
"Plan Year" means the calendar year.
"Retirement" means eligibility to receive immediate retirement benefits
under a Participating Company pension plan.
"Restricted Stock" means Stock awarded under Section 7 of the Plan subject
to such restrictions as the Committee deems appropriate or desirable.
"Right" means a stock appreciation right awarded in connection with an
Option under Section 5 of the Plan.
"Stock" means the common stock ($.01 par value) of the Company.
"Total Disability" means the complete and permanent inability of a Key
Employee to perform all of his or her duties under the terms of his or her
employment with any Participating Company, as determined by the Committee upon
the basis of such evidence, including independent medical reports and data, as
the Committee deems appropriate or necessary.
3. SHARES SUBJECT TO THE PLAN
The aggregate number of shares of Stock which may be awarded under the Plan
in any Plan Year shall be subject to an annual limit. The maximum number of
shares of Stock for which Awards may be granted under the Plan in each Plan Year
shall be 1.5 percent (1.5%) of the total of the issued and outstanding shares of
The Hartford Common Stock and Treasury Stock as reported in the Annual Report on
Form 10-K of the Company for the fiscal year ending immediately prior to any
Plan Year. Any unused portion of the Annual Limit for any Plan Year shall be
carried forward and be made available for awards in succeeding Plan Years.
In addition to the foregoing, in no event shall more than five million
(5,000,000) shares of ITT Hartford Common Stock be cumulatively available for
Awards of incentive stock options under the Plan, and provided further, that no
more than twenty percent (20%) of the total number of shares on a cumulative
basis shall be available for restricted stock and performance shares Awards. For
any Plan Year, no individual employee may receive an Award of stock options for
more than the lesser of (i) ten percent (10%) of the Annual Limit on available
shares applicable to that Plan Year and (ii) 500,000 shares; except that, for
the Plan Year that follows the Distribution Date, each individual employee may
receive in addition to the foregoing limit that number of stock options equal to
the lesser of (x) 525,000 and (y) the number of substitute stock options
required to replace ITT Corporation stock options surrendered by such employee
in connection with the spin-off by ITT Corporation of the shares of The Hartford
to ITT Corporation shareholders.
- 3 -
<PAGE>
Subject to the above limitations, shares of The Hartford Common Stock to be
issued under the Plan may be made available from the authorized but unissued
shares, or shares held by the Company in treasury or from shares purchased in
the open market.
For the purpose of computing the total number of shares of Stock available
for Awards under the Plan, there shall be counted against the foregoing
limitations the number of shares of Stock subject to issuance upon exercise or
settlement of Awards and the number of shares of Stock which equal the value of
performance share Awards, in each case determined as at the dates on which such
Awards are granted. If any Awards under the Plan are forfeited, terminated,
expire unexercised, are settled in cash in lieu of Stock or are exchanged for
other Awards, the shares of Stock which were theretofore subject to such Awards
shall again be available for Awards under the Plan to the extent of such
forfeiture, termination, expiration cash settlement or exchange of such Awards.
Further, any shares that are exchanged (either actually or constructively) by
optionees as full or partial payment to the Company of the purchase price of
shares being acquired through the exercise of a stock option granted under the
Plan may be available for subsequent Awards.
4. GRANT OF AWARDS AND AWARD AGREEMENTS
(a) Subject to the provisions of the Plan, the Committee shall (i) determine
and designate from time to time those Key Employees or groups of Key Employees
to whom Awards are to be granted; (ii) determine the form or forms of Award to
be granted to any Key Employee; (iii) determine the amount or number of shares
of Stock subject to each Award; and (iv) determine the terms and conditions of
each Award.
(b) Each Award granted under the Plan shall be evidenced by a written Award
Agreement. Such agreement shall be subject to and incorporate the express terms
and conditions, if any, required under the Plan or required by the Committee.
5. STOCK OPTIONS AND RIGHTS
(a) With respect to Options and Rights, the Committee shall (i) authorize
the granting of Incentive Stock Options, non-qualified stock options, or a
combination of Incentive Stock Options and non-qualified stock options; (ii)
authorize the granting of Rights which may be granted in connection with all or
part of any Option granted under this Plan, either concurrently with the grant
of the Option or at any time thereafter during the term of the Option; (iii)
determine the number of shares of Stock subject to each Option or the number of
shares of Stock that shall be used to determine the value of a Right; and (iv)
determine the time or times when and the manner in which each Option or Right
shall be exercisable and the duration of the exercise period.
- 4 -
<PAGE>
(b) Any option issued hereunder which is intended to qualify as an Incentive
Stock Option shall be subject to such limitations or requirements as may be
necessary for the purposes of Section 422 of the Code or any regulations and
rulings thereunder to the extent and in such form as determined by the Committee
in its discretion.
(c) The exercise period for a non-qualified stock option and any related
Right shall not exceed ten years and two days from the date of grant, and the
exercise period for an Incentive Stock Option and any related Right shall not
exceed ten years from the date of grant.
(d) The Option price per share shall be determined by the Committee at the
time any Option is granted and shall be not less than the Fair Market Value of
one share of Stock on the date the Option is granted.
(e) No part of any Option or Right may be exercised until the Key Employee
who has been granted the Award shall have remained in the employ of a
Participating Company for such period after the date of grant as the Committee
may specify, if any, and the Committee may further require exercisability in
installments.
(f) The purchase price of the shares as to which an Option shall be
exercised shall be paid to the Company at the time of exercise either in cash or
Stock already owned by the optionee having a total Fair Market Value equal to
the purchase price, or a combination of cash and Stock having a total fair
market value, as so determined, equal to the purchase price. The Committee shall
determine acceptable methods for tendering Stock as payment upon exercise of an
Option and may impose such limitations and prohibitions on the use of Stock to
exercise an Option as it deems appropriate.
(g) In case of termination of employment, the following provisions shall
apply:
(A) If a Key Employee who has been granted an Option shall die before
such Option has expired, his or her Option may be exercised in full by the
person or persons to whom the Key Employee's rights under the Option pass by
will, or if no such person has such right, by his or her executors or
administrators, at any time, or from time to time, within five years after
the date of the Key Employee's death or within such other period, and
subject to such terms and conditions as the Committee may specify, but not
later than the expiration date specified in Section 5(d) above.
(B) If the Key Employee's employment by any Participating Company
terminates because of his or her Retirement or Total Disability, he or she
may exercise his or her Options in full at any time, or from time to time,
within five years after the date of the termination of his or her employment
or within such other period, and subject to such terms and conditions as the
Committee may
- 5 -
<PAGE>
specify, but not later than the expiration date specified in Section 5(d)
above. Any such Options not fully exercisable immediately prior to such
optionee's retirement shall become fully exercisable upon such retirement
unless the Committee, in its sole discretion, shall otherwise determine.
(C) Except as provided in Section 9, if the Key Employee shall
voluntarily resign before eligibility for Retirement or he or she is
terminated for cause as determined by the Committee, the Options or Rights
shall be canceled coincident with the effective date of the termination of
employment.
(D) If the Key Employee's employment terminates for any other reason, he
or she may exercise his or her Options, to the extent that he or she shall
have been entitled to do so at the date of the termination of his or her
employment, at any time, or from time to time, within three months after the
date of the termination of his or her employment or within such other
period, and subject to such terms and conditions as the Committee may
specify, but not later than the expiration date specified in Section 5(d)
above.
(h) No Option or Right granted under the Plan shall be transferable other
than by will or by the laws of descent and distribution. During the lifetime of
the optionee, an Option or Right shall be exercisable only by the Key Employee
to whom the Option or Right is granted (or his or her estate or designated
beneficiary).
(i) With respect to an Incentive Stock Option, the Committee shall specify
such terms and provisions as the Committee may determine to be necessary or
desirable in order to qualify such Option as an "incentive stock option" within
the meaning of Section 422 of the Code.
(j) With respect to the exercisability and settlement of Rights:
(i) Upon exercise of a Right, the Key Employee shall be entitled,
subject to such terms and conditions the Committee may specify, to receive
upon exercise thereof all or a portion of the excess of (A) the Fair Market
Value of a specified number of shares of Stock at the time of exercise, as
determined by the Committee, over (B) a specified amount which shall not,
subject to Section 5(e), be less than the Fair Market Value of such
specified number of shares of Stock at the time the Right is granted. Upon
exercise of a Right, payment of such excess shall be made as the Committee
shall specify in cash, the issuance or transfer to the Key Employee of whole
shares of Stock with a Fair Market Value at such time equal to any excess,
or a combination of cash and shares of Stock with a combined Fair Market
Value at such time equal to any such excess, all as determined by the
Committee. The Company will not issue a fractional share of Stock and, if a
fractional share would otherwise be issuable, the Company shall pay cash
equal to the Fair Market Value of the fractional share of Stock at such
time.
- 6 -
<PAGE>
(ii) In the event of the exercise of such Right, the Company's
obligation in respect of any related Option or such portion thereof will be
discharged by payment of the Right so exercised.
6. PERFORMANCE SHARES
(a) Subject to the provisions of the Plan, the Committee shall (i) determine
and designate from time to time those Key Employees or groups of Key Employees
to whom Awards of Performance Shares are to be made, (ii) determine the
Performance Period (the "Performance Period") and Performance Objectives (the
"Performance Objectives") applicable to such Awards, (iii) determine the form of
settlement of a Performance Share and (iv) generally determine the terms and
conditions of each such Award. At any date, each Performance Share shall have a
value equal to the Fair Market Value of a share of Stock at such date; provided
that the Committee may limit the aggregate amount payable upon the settlement of
any Award. The maximum award for any individual employee in any given year shall
be 100,000 Performance Shares.
(b) The Committee shall determine a Performance Period of not less than two
nor more than five years. Performance Periods may overlap and Key Employees may
participate simultaneously with respect to Performance Shares for which
different Performance Periods are prescribed.
(c) The Committee shall determine the Performance Objectives of Awards of
Performance Shares. Performance Objectives may vary from Key Employee to Key
Employee and between groups of Key Employees and shall be based upon one or more
of the following objective criteria, as the Committee deems appropriate, which
may be (i) determined solely by reference to the performance of the Company, any
subsidiary or affiliate of the Company or any division or unit of any of the
foregoing, or (ii) based on comparative performance of any one or more of the
following relative to other entities: (A) earnings per share, (B) return on
equity, (C) cash flow, (D) return on total capital, (E) return on assets, (F)
economic value added, (G) increase in surplus, (H) reductions in operating
expenses, (I) increases in operating margins (J) earnings before income taxes
and depreciation, (K) total shareholder return (L) return on invested capital,
(M) cost reductions and savings, (N) earnings before interest, taxes,
depreciation and amortization ("EDITDA"), (O) pre-tax operating income, (P)
productivity improvements, or (Q) a Key Employee's attainment of personal
objectives with respect to any of the foregoing criteria or other criteria such
as growth and profitability, customer satisfaction, leadership effectiveness,
business development, negotiating transactions and sales or developing long term
business goals. If during the course of a Performance Period there shall occur
significant events which the Committee expects to have a substantial effect on
the applicable Performance Objectives during such period, the Committee may
revise such Performance Objectives.
- 7 -
<PAGE>
(d) At the beginning of a Performance Period, the Committee shall determine
for each Key Employee or group of Key Employees the number of Performance Shares
or the percentage of Performance Shares which shall be paid to the Key Employee
or member of the group of Key Employees if the applicable Performance Objectives
are met in whole or in part.
(e) If a Key Employee terminates service with all Participating Companies
during a Performance Period because of death, Total Disability, Retirement, or
under other circumstances where the Committee in its sole discretion finds that
a waiver would be in the best interests of the Company, that Key Employee may,
as determined by the Committee, be entitled to payment in settlement of such
Performance Shares at the end of the Performance Period based upon the extent to
which the Performance Objectives were satisfied at the end of such period and
prorated for the portion of the Performance Period during which the Key Employee
was employed by any Participating Company; provided, however, the Committee may
provide for an earlier payment in settlement of such Performance Shares in such
amount and under such terms and conditions as the Committee deems appropriate or
desirable. If a Key Employee terminates service with all Participating Companies
during a Performance Period for any other reason, then such Key Employee shall
not be entitled to any Award with respect to that Performance Period unless the
Committee shall otherwise determine.
(f) Each Award of a Performance Share shall be paid in whole shares of
Stock, or cash, or a combination of Stock and cash either as a lump sum payment
or in annual installments, all as the Committee shall determine, with payment to
commence as soon as practicable after the end of the relevant Performance
Period.
7. RESTRICTED STOCK
(a) Restricted Stock shall be subject to a restriction period (after which
restrictions will lapse) which shall mean a period commencing on the date the
Award is granted and ending on such date as the Committee shall determine (the
"Restriction Period"). The Committee may provide for the lapse of restrictions
in installments where deemed appropriate and it may also require the achievement
of predetermined performance objectives in order for such shares to vest.
(b) Except when the Committee determines otherwise pursuant to Section 7(d),
if a Key Employee terminates employment with all Participating Companies for any
reason before the expiration of the Restriction Period, all shares of Restricted
Stock still subject to restriction shall be forfeited by the Key Employee and
shall be reacquired by the Company.
- 8 -
<PAGE>
(c) Except as otherwise provided in this Section 7, no shares of Restricted
Stock received by a Key Employee shall be sold, exchanged, transferred, pledged,
hypothecated or otherwise disposed of during the Restriction Period.
(d) In cases of death, Total Disability or Retirement or in cases of special
circumstances, the Committee may, in its sole discretion when it finds that a
waiver would be in the best interests of the Company, elect to waive any or all
remaining restrictions with respect to such Key Employee's Restricted Stock.
(e) The Committee may require, under such terms and conditions as it deems
appropriate or desirable, that the certificates for Stock delivered under the
Plan may be held in custody by a bank or other institution, or that the Company
may itself hold such shares in custody until the Restriction Period expires or
until restrictions thereon otherwise lapse, and may require, as a condition of
any Award of Restricted Stock that the Key Employee shall have delivered a stock
power endorsed in blank relating to the Restricted Stock.
(f) Nothing in this Section 7 shall preclude a Key Employee from exchanging
any shares of Restricted Stock subject to the restrictions contained herein for
any other shares of Stock that are similarly restricted.
(g) Subject to Section 7(e) and Section 8, each Key Employee entitled to
receive Restricted Stock under the Plan shall be issued a certificate for the
shares of Stock. Such certificate shall be registered in the name of the Key
Employee, and shall bear an appropriate legend reciting the terms, conditions
and restrictions, if any, applicable to such Award and shall be subject to
appropriate stop-transfer orders.
8. CERTIFICATES FOR AWARDS OF STOCK
(a) The Company shall not be required to issue or deliver any certificates
for shares of Stock prior to (i) the listing of such shares on any stock
exchange on which the Stock may then be listed and (ii) the completion of any
registration or qualification of such shares under any federal or state law, or
any ruling or regulation of any government body which the Company shall, in its
sole discretion, determine to be necessary or advisable.
(b) All certificates for shares of Stock delivered under the Plan shall also
be subject to such stop-transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations, and other requirements of the
Securities and Exchange Commission, any stock exchange upon which the Stock is
then listed and any applicable federal or state securities laws, and the
Committee may cause a legend or legends to be placed on any such certificates to
make appropriate reference to such restrictions. In making such determination,
the Committee may rely upon an opinion of counsel for the Company.
- 9 -
<PAGE>
(c) Except for the restrictions on Restricted Stock under Section 7, each
Key Employee who receives Stock in settlement of an Award of Stock, shall have
all of the rights of a shareholder with respect to such shares, including the
right to vote the shares and receive dividends and other distributions. No Key
Employee awarded an Option, a Right or Performance Share shall have any right as
a shareholder with respect to any shares covered by his or her Option, Right or
Performance Share prior to the date of issuance to him or her of a certificate
or certificates for such shares.
9. ACCELERATION EVENTS
(a) For the purposes of this Plan, an Acceleration Event shall occur if (i)
a report on Schedule 13D shall be filed with the Securities and Exchange
Commission pursuant to Section 13(d) of the Act disclosing that any person
(within the meaning of Section 13(d) of the Act), other than the Company or a
subsidiary of the Company or any employee benefit plan sponsored by the Company
or a subsidiary of the Company, is the beneficial owner directly or indirectly
of twenty percent or more of the outstanding Stock of the Company; (ii) any
person (within the meaning of Section 13(d) of the Act), other than the Company
or a subsidiary of the Company or any employee benefit plan sponsored by the
Company or a subsidiary of the Company, shall purchase shares pursuant to a
tender offer or exchange offer to acquire any Stock of the Company (or
securities convertible into Stock) for cash, securities or any other
consideration, provided that after consummation of the offer, the person in
question is the beneficial owner (as such term is defined in Rule 13d-3 under
the Act), directly or indirectly, of fifteen percent or more of the outstanding
Stock of the Company (calculated as provided in paragraph (d) of Rule 13d-3
under the Act in the case of rights to acquire Stock); (iii) the stockholders of
the Company shall approve (A) any consolidation or merger of the Company in
which the Company is not the continuing or surviving corporation or pursuant to
which shares of Stock of the Company would be converted into cash, securities or
other property, other than a merger of the Company in which holders of Stock of
the Company immediately prior to the merger have the same proportionate
ownership of common stock of the surviving corporation immediately after the
merger as immediately before, or (B) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all or substantially
all the assets of the Company; or (iv) there shall have been a change in a
majority of the members of the Board within a 12-month period unless the
election or nomination for election by the Company's stockholders of each new
director during such 12-month period was approved by the vote of two-thirds of
the directors then still in office who were directors at the beginning of such
12-month period.
(b) Notwithstanding any provisions in this Plan to the contrary:
(i) Each outstanding Option granted under the Plan shall become
immediately exercisable in full for the aggregate number of shares covered
thereby and all
- 10 -
<PAGE>
related Rights shall also become exercisable upon the occurrence of an
Acceleration Event described in this Section 9 and shall continue to be
exercisable in full for cash for a period of 60 calendar days beginning on
the date that such Acceleration Event occurs and ending on the 60th
calendar day following that date; provided, however, that no Option or
Right shall be exercisable beyond the expiration date of its original term.
(ii) Options and Rights shall not terminate and shall continue to be
fully exercisable for a period of seven months following the occurrence of
an Acceleration Event in the case of an employee who is terminated other
than for just cause or who voluntarily terminates his employment because he
in good faith believes that as a result of such Acceleration Event he is
unable effectively to discharge his present duties or the duties of the
position he occupied just prior to the occurrence of such Acceleration
Event. For purposes of Section 9 only, termination shall be for "just cause"
only if such termination is based on fraud, misappropriation or embezzlement
on the part of the employee which results in a final conviction of a felony.
Under no circumstances, however, shall any Option or Right be exercised
beyond the expiration date of its original term.
(iii) Any Right or portion thereof may be exercised for cash within the
60-calendar-day period following the occurrence of an Acceleration Event
with settlement, except in the case of a Right related to an Incentive Stock
Option, based on the "Formula Price" which shall be the highest of (A) the
highest composite daily closing price of the Stock during the period
beginning on the 60th calendar day prior to the date on which the Right is
exercised and ending on the date such Right is exercised, (B) the highest
gross price paid for the Stock during the same period of time, as reported
in a report on Schedule 13D filed with the Securities and Exchange
Commission or (C) the highest gross price paid or to be paid for a share of
Stock (whether by way of exchange, conversion, distribution upon merger,
liquidation or otherwise) in any of the transactions set forth in this
Section 9 as constituting an Acceleration Event.
(iv) Upon the occurrence of an Acceleration Event, Limited Stock
Appreciation Rights shall automatically be granted as to any Option with
respect to which Rights are not then outstanding; provided, however, that
Limited Stock Appreciation Rights shall be provided at the time of grant of
any Incentive Stock Option subject to exercisability upon the occurrence of
an Acceleration Event. Limited Stock Appreciation Rights shall entitle the
holder thereof, upon exercise of such rights and surrender of the related
Option or any portion thereof, to receive, without payment to the Company
(except for applicable withholding taxes), an amount in cash equal to the
excess, if any, of the Formula Price as that term is defined in Section 9
over the option price of the Stock as provided in such Option; provided that
in the case of the exercise of any such Limited Stock Appreciation Right or
portion thereof related to an Incentive Stock Option, the Fair Market Value
of the Stock at the time of such exercise shall be substituted
- 11 -
<PAGE>
for the Formula Price. Each such Limited Stock Appreciation Right shall be
exercisable only during the period beginning on the first business day
following the occurrence of such Acceleration Event and ending on the 60th
day following such date and only to the same extent the related Option is
exercisable. Upon exercise of a Limited Stock Appreciation Right and
surrender of the related Option, or portion thereof, such Option, to the
extent surrendered, shall not thereafter be exercisable.
(v) The restrictions applicable to Awards of Restricted Stock issued
pursuant to Section 7 shall lapse upon the occurrence of an Acceleration
Event and the Company shall issue stock certificates without a restrictive
legend. Key Employees holding Restricted Stock on the date of an
Acceleration Event may tender such Restricted Stock to the Company which
shall pay the Formula Price as that term is defined in Section 9; provided,
such Restricted Stock must be tendered to the Company within 60 calendar
days of the Acceleration Event.
(vi) If an Acceleration Event occurs during the course of a Performance
Period applicable to an Award of Performance Shares pursuant to Section 6,
then the Key Employee shall be deemed to have satisfied the Performance
Objectives and settlement of such Performance Shares shall be based on the
Formula Price, as defined in this Section 9.
10. BENEFICIARY
(a) Each Key Employee shall file with the Company a written designation of
one or more persons as the Beneficiary who shall be entitled to receive the
Award, if any, payable under the Plan upon his or her death. A Key Employee may
from time to time revoke or change his or her Beneficiary designation without
the consent of any prior Beneficiary by filing a new designation with the
Company. The last such designation received by the Company shall be controlling;
provided, however, that no designation, or change or revocation thereof, shall
be effective unless received by the Company prior to the Key Employee's death,
and in no event shall it be effective as of a date prior to such receipt.
(b) If no such Beneficiary designation is in effect at the time of a Key
Employee's death, or if no designated Beneficiary survives the Key Employee or
if such designation conflicts with law, the Key Employee's estate shall be
entitled to receive the Award, if any, payable under the Plan upon his or her
death. If the Committee is in doubt as to the right of any person to receive
such Award, the Company may retain such Award, without liability for any
interest thereon, until the Committee determines the rights thereto, or the
Company may pay such Award into any court of appropriate jurisdiction and such
payment shall be a complete discharge of the liability of the Company therefor.
11. ADMINISTRATION OF THE PLAN
- 12 -
<PAGE>
(a) Each member of the Committee shall be both a member of the Board and
both a "non-employee director" within the meaning of Rule 16b-3 under
the Act or successor rule or regulation and an "outside director" for
purposes of Section 162(m) of the Internal Revenue Code.
(b) All decisions, determinations or actions of the Committee made or taken
pursuant to grants of authority under the Plan shall be made or taken in the
sole discretion of the Committee and shall be final, conclusive and binding on
all persons for all purposes.
(c) The Committee shall have full power, discretion and authority to
interpret, construe and administer the Plan and any part thereof, and its
interpretations and constructions thereof and actions taken thereunder shall be,
except as otherwise determined by the Board, final, conclusive and binding on
all persons for all purposes.
(d) The Committee's decisions and determinations under the Plan need not be
uniform and may be made selectively among Key Employees, whether or not such Key
Employees are similarly situated.
(e) The Committee may, in its sole discretion, delegate such of its powers
as it deems appropriate to the chief executive officer or other members of
senior management, except that Awards to executive officers shall be made solely
by the Committee and subject to compliance with Rule 16b-3 of the Act.
(f) If an Acceleration Event has not occurred and if the Committee
determines that a Key Employee has taken action inimical to the best interests
of any Participating Company, the Committee may, in its sole discretion,
terminate in whole or in part such portion of any Option (including any related
Right) as has not yet become exercisable at the time of termination, terminate
any Performance Share Award for which the Performance Period has not been
completed or terminate any Award of Restricted Stock for which the Restriction
Period has not lapsed.
12. AMENDMENT, EXTENSION OR TERMINATION
The Board may, at any time, amend or terminate the Plan and, specifically,
may make such modifications to the Plan as it deems necessary to avoid the
application of Section 162(m) of the Code and the Treasury regulations issued
thereunder. However, no amendment applicable to Incentive Stock Options shall,
without approval by a majority of the Company's stockholders, (a) alter the
group of persons eligible to participate in the Plan, or (b) except as provided
in Section 13 increase the maximum number of shares of Stock which are available
for Awards
- 13 -
<PAGE>
under the Plan. If an Acceleration Event has occurred, no amendment
or termination shall impair the rights of any person with respect to a prior
Award.
13. ADJUSTMENTS IN EVENT OF CHANGE IN COMMON STOCK
In the event of any reorganization, merger, recapitalization, consolidation,
liquidation, stock dividend, stock split, reclassification, combination of
shares, rights offering, split-up or extraordinary dividend (including a
spin-off) or divestiture, or any other change in the corporate structure or
shares, the Committee may make such adjustment in the Stock subject to Awards,
including Stock subject to purchase by an Option, or the terms, conditions or
restrictions on Stock or Awards, including the price payable upon the exercise
of such Option and the number of shares subject to restricted stock awards, as
the Committee deems equitable.
14. SUBSTITUTE AWARDS
The Committee shall be authorized to issue substitute The Hartford stock
options and related rights to those key employees of Participating Companies who
surrender options to acquire stock in ITT Corporation. The Committee may make a
determination as to the exercise price and number of such substitute options as
it may determine in order to preserve the economic value of the surrendered ITT
options and related rights in the aggregate amount not to exceed 8,000,000
shares. Subject to this limitation, shares of The Hartford Common Stock to be
issued upon the exercise of substitute stock options may be made available from
authorized but unissued shares or from treasury or shares held by The Hartford
in shares purchased in the open market.
The maximum number of substitute The Hartford stock options and related
rights that may be granted to an individual employee is 525,000 or such lower
number as may be necessary to preserve the economic value of the surrendered ITT
options and related rights by any such individual employee.
The terms and conditions of each substitute stock award, including, without
limitation, the expiration date of the option, the time or times when, and the
manner in which, each substitute option shall be exercisable, the duration of
the exercise period, the method of exercise, settlement and payment, and the
rules in the event of termination, shall be the same as those of the surrendered
ITT award.
The Committee shall also be authorized to issue substitute grants of The
Hartford Restricted Stock to replace shares of ITT restricted stock surrendered
by employees of Participating Companies. Such substitute shares shall be subject
to the same terms and conditions as the surrendered shares of ITT restricted
stock, including, without limitation, the restriction period of such ITT shares.
- 14 -
<PAGE>
15. MISCELLANEOUS
(a) Except as provided in Section 9, nothing in this Plan or any Award
granted hereunder shall confer upon any employee any right to continue in the
employ of any Participating Company or interfere in any way with the right of
any Participating Company to terminate his or her employment at any time. No
Award payable under the Plan shall be deemed salary or compensation for the
purpose of computing benefits under any employee benefit plan or other
arrangement of any Participating Company for the benefit of its employees unless
the Company shall determine otherwise. No Key Employee shall have any claim to
an Award until it is actually granted under the Plan. To the extent that any
person acquires a right to receive payments from the Company under this Plan,
such right shall be no greater than the right of an unsecured general creditor
of the Company. All payments to be made hereunder shall be paid from the general
funds of the Company and no special or separate fund shall be established and no
segregation of assets shall be made to assure payment of such amounts except as
provided in Section 7(e) with respect to Restricted Stock.
(b) The Committee may cause to be made, as a condition precedent to the
payment of any Award, or otherwise, appropriate arrangements with the Key
Employee or his or her Beneficiary, for the withholding of any federal, state,
local or foreign taxes.
(c) The Plan and the grant of Awards shall be subject to all applicable
federal and state laws, rules, and regulations and to such approvals by any
government or regulatory agency as may be required.
(d) The terms of the Plan shall be binding upon the Company and its
successors and assigns.
(e) Captions preceding the sections hereof are inserted solely as a matter
of convenience and in no way define or limit the scope or intent of any
provision hereof.
16. EFFECTIVE DATE, TERM OF PLAN AND SHAREHOLDER APPROVAL
The effective date of the Plan shall be December 19, 1995. No Award shall be
granted under this Plan after the Plan's termination date. The Plan's
termination date shall be December 31, 2005. The Plan will continue in effect
for existing Awards as long as any such Award is outstanding.
- 15 -
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 31,889
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,840
<MORTGAGE> 2
<REAL-ESTATE> 36
<TOTAL-INVEST> 37,960
<CASH> 146
<RECOVER-REINSURE> 11,367
<DEFERRED-ACQUISITION> 3,698
<TOTAL-ASSETS> 111,522
<POLICY-LOSSES> 23,004
<UNEARNED-PREMIUMS> 2,936
<POLICY-OTHER> 21,595
<POLICY-HOLDER-FUNDS> 52,125
<NOTES-PAYABLE> 2,162
1,000 <F1>
0
<COMMON> 1
<OTHER-SE> 4,380
<TOTAL-LIABILITY-AND-EQUITY> 111,522
2,452
<INVESTMENT-INCOME> 629
<INVESTMENT-GAINS> 37
<OTHER-INCOME> 0
<BENEFITS> 1,958
<UNDERWRITING-AMORTIZATION> 454
<UNDERWRITING-OTHER> 388
<INCOME-PRETAX> 274
<INCOME-TAX> 70
<INCOME-CONTINUING> 204
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 204
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.73
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> REPRESENTS COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY PARENT JUNIOR SUBORDINATED DEBENTURES.
</FN>
</TABLE>
